Abolition of the offsetting mechanism from 1 May 2025
As we noted in our last article, the Hong Kong Legislative Council haspassed legislation abolishing the MandatoryProvidentFund (‘MPF’)offsetting mechanism. At a Labour Day reception held on 28 April 2023, the Chief Executive of the HongKongSAR, John Lee Ka-chiu, announced that the abolition will take effect from 1 May 2025. This means that from this date, employers will no longer be permitted to use the accrued benefits derived from their mandatory contributions to their employees’ MPF scheme to offset statutory severance or long service payments.
The Hong Kong government is planning to launch a 25 year subsidy scheme that is worth approximately HKD 33 billion, to share employers’ costs on severance and long service payments. During the first 3 years of the subsidy scheme, an employer’s severance and long service payment liability will be capped at HKD 3,000 per employee (provided that the total liability does not exceed HKD 500,000 per year). The government will bear the rest of the costs. From the fourth year onwards, the payment caps will gradually rise, and the subsidy amount will gradually decrease. We expect to receive further details from the government on this and will provide further updates when we do.
Potential increase in MPF contributions
According to recent press reports, the Hong Kong Mandatory Provident Fund Schemes Authority (the ‘MPFA’) will soon conduct a review on the minimum and maximum relevant income levels for mandatory monthly MPF contributions.
Currently, employees and employers are each required to contribute 5% of the employee’s relevant income into a MPF scheme, subject to limited exceptions. The relevant income levels are however subject to minimum and maximum limits. The minimum limit is HKD 7,100 per month. This means that if an employee’s monthly relevant income is less than HKD 7,100, the employee will not be required to make any mandatory MPF contributions (though the employer is still required to contribute 5%). The maximum limit is HKD 30,000 per month. This means that if an employee’s monthly relevant income exceeds HKD 30,000, the mandatory contributions for the employer and the employee will both be capped at HKD 1,500.
The minimum and maximum relevant income levels were last adjustedin 2013 and 2014 respectively. As these levels have not been adjusted for about a decade, the business sector expects that the MPFA will likely propose that the Hong Kong government increase the minimum and maximum relevant income levels, considering the overall increase in wages over the past decade.
There have been concerns expressed that the potential increase in mandatory MPF contributions may increase the financial burden on employees and employers, especially for SMEs that were severely impacted by COVID and are now struggling to recover. To alleviate any impact on the recovering economy, it is expected that any adjustments to the mandatory contribution levels will be implemented in stages, giving employers and employees some time to plan ahead.
We will provide an update once a formal proposal has been put forward by the MPFA.